i

FORWARD-LOOKING STATEMENTS

 

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  In addition, other statements we may make from time to time, such as press releases, oral statements made by Company officials and other reports we file with the Securities and Exchange Commission, may also contain such forward-looking statements.  Forward-looking statements in this report include, but are not limited to, statements regarding:

·	our strategy;

·	our plans to continue to use significant portions of our cash resources to make substantial investments in land and the source of funds for such investments;

·	our plans to invest in larger land parcels;

·	the strength of our land pipeline;

·	our plans to maintain a supply of speculative homes in each community;

·	housing market conditions and trends in the geographic markets in which we operate;

·	the impact of future market rate risks on our financial assets and borrowings;

·	our expectation to convert year-end backlog in 2017;

·	the sufficiency of our warranty and other reserves;

·	trends in new home deliveries, orders, backlog, home pricing, leverage and gross margins;

·	the sufficiency of our liquidity to implement our strategy and our ability to access additional capital and refinance existing indebtedness;

·	litigation outcomes and related costs;

·	plans to purchase our notes prior to maturity and to engage in debt exchange transactions;

·	the effect of seasonal trends;

·	our ability to realize the value of our deferred tax assets and the timing relating thereto;

·	our plans to enhance revenue while maintaining an appropriate sales pace;

·	that we may acquire other homebuilders;

·	the market rate risks relating to our debt and investments;

·	our plans to concentrate operations and capital in growing markets;

·	amounts remaining to complete relating to existing surety bonds; and

·	the impact of recent accounting standards.

Forward-looking statements are based on our current expectations or beliefs regarding future events or circumstances, and you should not place undue reliance on these statements.  Such statements involve known and unknown risks, uncertainties, assumptions and other factors—many of which are out of our control and difficult to forecast—that may cause actual results to differ materially from those that may be described or implied.  Such factors include, but are not limited to, the risks described in this Annual Report under the heading "Risk Factors," which are incorporated by reference herein.

Except as required by law, we assume no, and hereby disclaim any, obligation to update any of the foregoing or any other forward-looking statements.  We nonetheless reserve the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this report.  No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

 

ii

CALATLANTIC GROUP, INC.

 

PART I

 

 

CalAtlantic Group, Inc. builds well-crafted homes in thoughtfully designed communities that meet the desires of customers across the homebuilding spectrum, from entry level to luxury, in over 40 metropolitan statistical areas spanning 17 states. Also providing mortgage, title and escrow services, we are focused on providing an exceptional end-to-end homebuying experience for our customers.  For the years ended December 31, 2016, 2015 and 2014 Homebuilding Revenue (consisting of home and land sales revenues) accounted for over 98% of our consolidated total revenue.

The Company's homebuilding operations are divided into four regions: North, Southeast, Southwest and West, consisting of the following metropolitan areas at December 31, 2016:

North

Atlanta, Baltimore, Chicago, Delaware, Indianapolis, Metro Washington D.C., Minneapolis/St. Paul, New Jersey, Northern Virginia and Philadelphia

Southeast

Charleston, Charlotte, Jacksonville, Orlando, Raleigh, South Florida, Tampa and Myrtle Beach

Southwest

Austin, Dallas, Denver, Houston, Las Vegas and San Antonio

West	Bay Area (Northern California), Inland Empire (Southern California), Phoenix, Sacramento, San Diego and Southern California Coastal

The percentage of our homes delivered by region and product mix for the year ended December 31, 2016 were as follows:

Region		Percentage of Deliveries
North		21%
Southeast		28
Southwest		28
West		23
Total		100%

 

Product Mix		Percentage of Deliveries
Move-up / Luxury / Active Adult		78%
Entry level		22
Total		100%

 

The average selling prices of our homes delivered by region for the year ended December 31, 2016 were as follows:

Region		Average Selling Price
		(Dollars in thousands)
North		$335
Southeast		$386
Southwest		$426
West		$649
Total		$447

Dollar Value of Backlog

The dollar value of our backlog as of December 31, 2016 was $2.7 billion, or 5,817 homes.  We expect all of our backlog at December 31, 2016 to be converted to deliveries and revenues during 2017, net of cancellations.

Homebuilding Operations

With a trusted reputation for quality craftsmanship, exceptional architectural design and an outstanding customer experience earned over our 51 year history, we utilize our five decades of land acquisition, development and homebuilding expertise to acquire and build desirable communities in locations that meet the high expectations of our homebuyers.   Our homes sizes typically range from approximately 1,500 to 3,500 square feet, although we have built homes from 1,100 to over 6,000 square feet.  The sales prices of our homes generally range from approximately $165,000 to over $2 million.  At December 31, 2016, we owned or controlled 65,424 homesites (including joint ventures) and had 583 active selling communities.  For the year ended December 31, 2016, approximately 85% of our deliveries were single-family detached homes.  The remainder of our deliveries were single-family attached homes, generally townhomes and condominiums configured with eight or fewer units per building.

We customize our home designs to meet the specific needs of each particular market and its customers' preferences. These preferences are reflected in every aspect of our community sales and marketing, including community locations and amenities, exterior styles, and model home merchandising.  We also offer structural and design options that allow customers to personalize their home to meet their needs and desires.

Financial Services Operations

We have a mortgage financing subsidiary that provided financing to 57% of our homebuyers who chose to finance their home purchases during 2016.  We also have a title subsidiary that provides title examination and other title and escrow related services and an insurance subsidiary that provides homeowners' and other insurance products to homebuyers in certain of our markets.  Staffed by a team of professionals experienced in the new home purchase process and our sales and escrow procedures, our financial services operations benefit our homebuyers by offering a dependable source of competitively priced financial services that are seamlessly integrated into our home sales and close process.  Each of these businesses complement our homebuilding operations by making the timing of our new home deliveries more predictable.  We sell substantially all of the loans we originate in the secondary mortgage market.

Strategy

Through the October 1, 2015 combination of Standard Pacific Homes and Ryland Homes to form CalAtlantic Group, Inc., we gained what we believe is important geographic and product diversification, expanding our reach and enhancing our growth prospects in the entry level, move-up and luxury market segments. While our homes span the price point spectrum, we intend to continue to focus the operations in most of our markets on serving the needs of the move-up homebuyers who we believe are more likely to value and pay for the quality construction and customer service experience that are the hallmarks of our legacy brands.

 

Our strategy includes the following elements:

·	acquire land in desirable locations at acceptable prices;

·	leverage our land acquisition and master plan development expertise and reputation to garner an advantage in the competitive market for highly sought after locations;

·	construct well built, innovatively designed, and energy efficient homes that cater to the way people live today and that are the preferred choice of homebuyers, from entry level through luxury;

·	provide an exceptional customer experience;

·	optimize the size of our business in each of our markets to appropriately leverage operating efficiencies;

·	maintain a cost structure that positions us for near and long-term profitability;

·	seek opportunities to enhance revenue while maintaining an appropriate sales pace; and

·	concentrate operations and invested capital in anticipated growth markets.

Marketing and Sales

Our homes are marketed through a variety of channels, including through individual communities where new homes are sold by local sales teams. At the community level, home shoppers have the opportunity to experience fully-furnished and landscaped model homes that demonstrate the livability of our floorplans. Our forward-thinking architectural philosophy is a key differentiator in marketing to the homebuyers we target. We closely examine buyer preferences communicated to our sales team and through buyer surveys. This research, coupled with the skilled expertise of architects who have both domestic and international experience, provides our homebuyer thoughtful solutions that cater to the way people live today through innovative ideas and practical conveniences.

Many buyers begin or supplement their buying process via online research, which allows us to engage and inform them through a robust website and a wide array of digital marketing initiatives. Brokers and real estate professionals are a viable extension of our sales team and we market to them directly.

Our homes are sold pursuant to written sales contracts that usually require the homebuyer to make a cash deposit.  We sell both pre-built and to-be-built homes.  The majority of our homebuyers have the opportunity to purchase various optional amenities and upgrades such as prewiring and electrical options, upgraded flooring, cabinets, finished carpentry and countertops, varied interior and exterior color schemes, additional and upgraded appliances, and some alternative room configurations. Purchasers are typically permitted for a limited time to cancel their contracts if they fail to qualify for financing. In some cases, purchasers are also permitted to cancel their contract if they are unable to sell their existing homes or if certain other conditions are not met. A buyer's liability to us for wrongfully terminating a sales contract is typically limited to the forfeiture of the buyer's cash deposit to the Company, although some states provide for more limited remedies.

Development and Construction

We customarily acquire unimproved or improved land zoned for residential use.  To control larger land parcels or gain access to highly desirable parcels, we sometimes form land development joint ventures with third parties that provide us the right to acquire from the joint venture a portion of the lots when developed.  If we purchase raw land or partially developed land, we will perform development work that may include negotiating with governmental agencies and local communities to obtain any necessary zoning, environmental and other regulatory approvals and permits, and constructing, as necessary, roads, water, sewer and drainage systems and recreational facilities like parks, community centers, pools, and hiking and biking trails.  With our long California heritage of creating master planned communities, we have expertise and experience in handling complex development opportunities.

We act as a general contractor with our supervisory employees coordinating most of the development and construction work on a project.  Independent architectural design, engineering and other consulting firms are generally engaged on a project-by-project basis to assist in project planning and community and home design, and subcontractors are engaged to perform all of the physical development and construction work.  Although the construction time for our homes varies from project to project depending on geographic region, the time of year, the size and complexity of the homes, local labor situations, the governmental approval processes, availability of materials and supplies, and other factors, we typically complete the construction of a home in approximately four to six months, with a current average cycle time of approximately five months.

Sources and Availability of Raw Materials

Seasonality and Longer Term Cycles

Our homebuilding operations have historically experienced seasonal fluctuations. We typically experience the highest new home order activity in the spring and summer months, although new order activity is highly dependent on the number of active selling communities and the timing of new community openings as well as other market factors. Because it typically takes us four to six months to construct a new home, we typically deliver a greater number of homes in the second half of the calendar year as spring and early summer orders are converted to home deliveries. As a result, our revenues and cash flows

(exclusive of the amount and timing of land purchases) from homebuilding operations are generally higher in the second half of the calendar year, particularly in the fourth quarter.

 

Our homebuilding operations are also subject to longer term business cycles, the magnitude, duration, beginning and ending of which are difficult to predict. At the high point of this business cycle, the demand for new homes and new home prices are at their peak. Land prices also tend to be at their peak in this phase of the cycle. At the low point in the cycle, the demand for homes is weak and land prices tend to be more favorable. While difficult to accomplish, our goal is to deliver as many homes as possible near the top of the cycle and to make significant investments in land at the bottom of the cycle.

 

We believe we were at or near the bottom of the current cycle for the several years prior to 2012 and, as such, made substantial investments in land.  We plan to continue to make substantial investments in land, which is likely to utilize a significant portion of our cash resources, so long as we believe that such investments will yield results that meet our investment criteria.

Competitive Conditions in the Business

The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor, and employees. We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. While we compete with other residential construction companies for customers, we also compete with resales of existing homes and rental properties.

Financing

We typically use both our equity (including internally generated funds from operations and proceeds from equity offerings and the exercise of stock options) and debt financing in the form of bank debt and note offerings, to fund land acquisition and development and construction of our properties.  To a lesser extent, we use seller financing to fund the acquisition of land and, in some markets, community facility district or other similar assessment district bond financing is used to fund community infrastructure such as roads, water and sewers.

We also utilize joint ventures and option arrangements with land sellers, other builders and developers as a means of accessing lot positions, expanding our market opportunities, establishing strategic alliances, leveraging our capital base and managing the financial and market risk associated with land holdings.  In addition to equity contributions made by us and our partners, our joint ventures may obtain secured project specific financing to fund the acquisition of land and development and construction costs.  For more detailed discussion of our current joint venture arrangements please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Off-Balance Sheet Arrangements".

Government Regulation

For a discussion of the impact of government regulations on our business, including the impact of environmental regulations, please see the risk factors included under the heading "Regulatory Risks" in the Risk Factors section.

Financial Services

Customer Financing

As part of our ongoing operations, we provide mortgage loans to many of our homebuyers through our mortgage financing subsidiary, CalAtlantic Mortgage.  Our mortgage subsidiary's principal sources of revenue are fees generated from loan originations, net gains on the sale of loans and net interest income earned on loans during the period we hold them prior to sale.  In addition to being a source of revenues, our mortgage operations benefit our homebuyers and complement our homebuilding operations by offering a dependable source of competitively priced financing, staffed by a team of professionals experienced in the new home purchase process and our sales and escrow procedures, all of which help to make our new home deliveries more predictable.

We sell substantially all of the loans we originate in the secondary mortgage market, with servicing rights released on a non-recourse basis.  These sales are generally subject to our obligation to repay the gain on sale if the loan is prepaid by the borrower within a certain time period following such sale, or to repurchase the loan if, among other things, the loan

purchaser's underwriting guidelines are not met or there is fraud in connection with the loan.  We record reserves for loan- related claims when we determine it is appropriate to do so.

For a portion of our loan originations, we manage the interest rate risk associated with making loan commitments to our customers and holding loans for sale by preselling loans.  Preselling loans consists of obtaining commitments (subject to certain conditions) from third party investors to purchase the mortgage loans while concurrently extending interest rate locks to loan applicants.  Before completing the sale to these investors, our mortgage subsidiary finances these loans under its mortgage credit facilities for a short period of time (typically for 30 to 45 days), while the investors complete their administrative review of the applicable loan documents.

We also originate a portion of our mortgage loans on a non-presold basis.  When originating mortgage loans on a non-presold basis, we lock interest rates with our customers and fund loans prior to obtaining purchase commitments from third party investors, thereby creating interest rate risk.  To hedge this interest rate risk, our mortgage subsidiary enters into forward sale commitments of mortgage-backed securities.  Loans originated in this manner are typically held by our mortgage subsidiary and financed under its mortgage credit facilities for a short period of time (typically for 30 to 45 days) before the loans are sold to third party investors.  Our mortgage subsidiary utilizes third party hedging software to assist with the execution of its hedging strategy for loans originated on a non-presold basis.

While preselling loans and our hedging strategy is designed to reduce our risk, our hedging strategy instruments involve elements of market risk related to fluctuations in interest rates that could result in losses on loans originated in this manner and we remain subject to risk relating to purchaser non-performance, particularly during periods of significant market turmoil.

Title, Escrow and Insurance Services

Our title, escrow and insurance subsidiaries provide title, escrow and insurance services to homebuyers in many of our markets.  We are in the process of expanding this business and, consequently, the level of title, escrow and insurance services we currently provide in any particular market vary, ranging from full title, escrow and insurance services in certain geographies to limited title examination services in others. 

Employees

At December 31, 2016, we had approximately 3,055 employees, up from approximately 2,850 employees at the prior year end.  Of our employees at the end of 2016, approximately 650 were executive, administrative and clerical personnel, 1,100 were sales and marketing personnel, 815 were involved in construction and project management, 175 were involved in new home warranty, and 315 worked in the financial services operations.  None of our employees are covered by collective bargaining agreements, although employees of some of the subcontractors that we use are represented by labor unions and may be subject to collective bargaining agreements.  We believe that our relations with our employees and subcontractors are good.

Business Segment Financial Data

For business segment financial data, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as Note 4 to our consolidated financial statements.

Availability of Reports

This annual report on Form 10-K and each of our quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments, are available free of charge on our website, www.calatlantichomes.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"). The information contained on our website is not incorporated by reference into this report and should not be considered part of this report.  In addition, the SEC website contains reports, proxy and information statements, and other information about us at www.sec.gov.

Company Information

In connection with our October 1, 2015 merger with The Ryland Group, Inc. ("Ryland"), we changed our name from Standard Pacific Corp. to CalAtlantic Group, Inc.  We were incorporated in the State of Delaware in 1991 and our common

stock is listed on the New York Stock Exchange (NYSE: CAA).  Through our predecessors, we commenced our homebuilding operations in 1965. Our principal executive offices are located at 1100 Wilson Boulevard, #2100, Arlington, Virginia 22209. Unless the context otherwise requires, the terms "we," "us," "our" and "the Company" refer to CalAtlantic Group, Inc. and its predecessors and subsidiaries.

 

The discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below.  They describe various risks and uncertainties to which we are or may become subject.  These risks and uncertainties, as well as other risks which we cannot foresee at this time, have the potential to affect our business, financial condition, results of operations, cash flows, strategies and prospects in a material and adverse manner.

 

Market and Economic Risks

Adverse economic conditions negatively impact the demand for homes.  A negative change in economic conditions could have adverse effects on our operating results and financial condition.

The homebuilding industry is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, availability of financing and interest rate levels. From approximately 2007 to 2011, the national recession, credit market disruption, high unemployment levels, absence of home price stability, and decreased availability of mortgage financing, among other factors, adversely impacted the homebuilding industry and our operations and financial condition.  Although the housing market has recovered in most of the geographies in which we operate, if market conditions deteriorate, our results of operations and financial condition could be adversely impacted.

The market value and availability of land may fluctuate significantly, which could decrease the value of our developed and undeveloped land holdings and limit our ability to develop new communities.

The risk of owning developed and undeveloped land can be substantial for us. Our strategy calls for us to continue to invest a substantial portion of our cash in land.  The market value of the undeveloped land, buildable lots and housing inventories we hold can fluctuate significantly as a result of changing economic and market conditions. During the national recession, we experienced negative economic and market conditions that resulted in the impairment of a significant number of our land positions and write-offs of some of our land option deposits. If economic or market conditions deteriorate in the future, we may have to impair our land holdings and projects, write down our investments in unconsolidated joint ventures, write off option deposits, sell homes or land at a loss, and/or hold land or homes in inventory longer than planned. In addition, inventory carrying costs (such as property taxes and interest) can be significant, particularly if inventory must be held for longer than planned, which can trigger asset impairments in poorly performing projects or markets. As we increase the amount of land we hold, we also increase our exposure to the risks associated with owning land, which means that if economic and market conditions were to deteriorate, it could have a significantly greater adverse impact on our financial condition.

Our long-term success also depends upon the continued availability of suitable land at acceptable prices. The availability of land for purchase at acceptable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding of land prices and restrictive governmental regulation. If a sufficient amount of suitable land opportunities do not become available, it could limit our ability to develop new communities, increase our land costs and negatively impact our sales and earnings.

Customers may be unwilling or unable to purchase our homes at times when mortgage-financing costs are high or when credit is difficult to obtain.

The majority of our homebuyers finance their new home purchase. In general, housing demand is adversely affected by increases in interest rates and by decreases in the availability of mortgage financing. Interest rates have been at historic lows for the last 7 years and, Corelogic, an aggregator of mortgage data, estimates that 66% of homeowners have mortgages with rates at or below 4.5%.  With mortgage rates widely anticipated to increase over the next several years, it is possible that homeowners with low interest rate mortgages may choose to remain in their current homes rather than purchase a new home in a higher interest rate environment.  In addition, underwriting standards remain tight, with lenders requiring high credit scores, substantial down payments and cash reserves, and the availability of subprime and other alternative mortgage products, which are important to sales in many of our markets, remains limited. The availability of mortgage financing is also affected by changes in liquidity in the secondary mortgage market and the market for mortgage-backed securities, which are directly impacted by the federal government's decisions regarding its financial support of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the entities that provide liquidity to the secondary market. If

the availability and cost of mortgage financing deteriorates, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes could be adversely affected, which could adversely affect our operating results and profitability.

The homebuilding industry is competitive and the business practices of homebuilders and other home sellers have the potential to negatively impact our sales and earnings.

The homebuilding industry is fragmented and highly competitive. We compete with numerous other residential construction companies, including large national and regional firms, for customers, land, financing, raw materials, skilled labor and employees.  Several of our larger competitors, because of their scale, may have lower costs of capital, labor, materials and overhead.  We compete for customers primarily on the basis of home design and location, price, customer satisfaction, construction quality, reputation, and the availability of mortgage financing. We also compete with resales of existing homes and rental properties.  Decisions made by competitors to reduce home sales prices and/or increase the use of sales incentives (which may be easier to do for larger competitors with lower cost structures or necessary for distressed sellers) may require us to do the same to maintain our sales pace, which will harm our financial results.

Labor and material shortages and price fluctuations could delay or increase the cost of home construction and reduce our sales and earnings.

The residential construction industry experiences serious labor and material shortages from time to time, including shortages in qualified tradespeople, and supplies of insulation, drywall, cement, steel and lumber. These labor and material shortages can be more severe during periods of strong demand for housing or during periods where the regions in which we operate experience natural disasters that have a significant impact on existing residential and commercial structures. The cost of material may also be adversely affected during periods of shortage or high inflation. The cost of labor may be adversely affected by shortages of qualified tradespeople such as carpenters, roofers, electricians and plumbers, changes in laws relating to union activity and changes in immigration laws and trends in labor migration.  During the national recession, a large number of qualified tradespeople went out of business or otherwise exited our markets. The reduction in available tradespeople is currently exacerbating labor shortages as demand for new housing has increased. From time to time, we have experienced volatile price swings in the cost of labor and materials, including in particular the cost of lumber, cement, steel and drywall. Shortages and price increases could cause delays in and increase our costs of home construction, which in turn could harm our operating results and profitability.

We may be unable to obtain suitable bonding for the development of our communities.

We are often required to provide bonds to governmental authorities and others to ensure the completion of our projects. If we are unable to obtain the required surety or performance bonds for our projects, our business operations and revenues could be adversely affected. From time to time, when market conditions become unfavorable, surety providers become reluctant to issue new bonds and some providers request credit enhancements (such as cash deposits or letters of credit) in order to maintain existing bonds or to issue new bonds. If we are unable to obtain required bonds in the future, or are required to provide credit enhancements with respect to our current or future bonds, our liquidity could be negatively impacted.

High cancellation rates may negatively impact our business.

In connection with the sale of a home we collect a deposit from the homebuyer that is a small percentage of the total purchase price.  The deposit may, in certain circumstances, be fully or partially refundable to our homebuyer prior to closing, depending on, among other things, the laws of the state in which the home is located.  If the prices for our homes in a given community decline, competitors increase sales incentives, interest rates increase, the availability of mortgage financing tightens or a buyer experiences a change in their personal finances, they may have an incentive to cancel their home purchase contracts with us, even where they might be entitled to no refund or only a partial refund of this deposit.  Significant cancellations could have a material adverse effect on our business.

Operational Risks

Our longer-term land acquisition strategy poses significant risks.

From time-to-time, we purchase land parcels with longer-term time horizons when we believe market conditions provide an opportunity to purchase this land at acceptable prices.  We plan to continue to invest a substantial portion of our cash in land, including in larger land parcels with longer holding periods that will require significant development activities. This strategy is subject to a number of risks. It is difficult to accurately forecast development costs and sales prices the longer the time horizon for a project and, with a longer time horizon, there is a greater chance that unanticipated

development cost increases, changes in general market conditions and other adverse unanticipated changes could negatively impact the profitability of a project. In addition, larger land parcels are generally undeveloped and typically do not have all (or sometimes any) of the governmental approvals necessary to develop and construct homes. If we are unable to obtain these approvals or obtain approvals that restrict our ability to use the land in ways we do not anticipate, the value of the parcel will be negatively impacted. In addition, the acquisition of land with a longer term development horizon historically has not been a significant focus of our business in many of our markets and may therefore be subject to greater execution risk.

Severe weather, other natural conditions or disasters and climate change may disrupt or delay construction.

Severe weather and other natural conditions or disasters, such as earthquakes, landslides, hurricanes, tornadoes, droughts, floods, heavy or prolonged rain or snow, and wildfires can negatively affect our operations by requiring us to delay or halt construction or to perform potentially costly repairs to our projects under construction and to unsold homes. Some conditions, like the severe drought California has experienced over the last several years, may cause state and local governments to take restrictive actions, including placing moratoriums on the issuance of building permits or the connection of new water meters, which may effectively halt new construction.  Finally, many scientists believe that the rising level of carbon dioxide in the atmosphere is leading to climate change and that climate change is increasing the frequency and severity of weather related disasters. If true, we may experience increasing negative weather related impacts to our operations in the future.

 

We are subject to product liability and warranty claims arising in the ordinary course of business, which can be costly.

As a homebuilder, we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the homebuilding industry and can be costly. While we maintain product liability insurance and generally seek to require our subcontractors and design professionals to indemnify us for some portion of the liabilities arising from their work, there can be no assurance that these insurance rights and indemnities will be collectable or adequate to cover any or all construction defect and warranty claims for which we may be liable. For example, contractual indemnities can be difficult to enforce, we are often responsible for applicable self-insured retentions (particularly in markets where we include our subcontractors on our general liability insurance and as a result our ability to seek indemnity for insured claims is significantly limited or nonexistent), certain claims may not be covered by insurance or may exceed applicable coverage limits, and one or more of our insurance carriers could become insolvent. Additionally, the coverage offered by and availability of product liability insurance for construction defects is limited and costly. There can be no assurance that coverage will not be further restricted, become more costly or even unavailable.

In addition, we conduct a material portion of our business in California, one of the most highly regulated and litigious jurisdictions in the United States, which imposes a ten year, strict liability tail on most construction liability claims. As a result, our potential losses and expenses due to litigation, new laws and regulations may be greater than our competitors who have smaller California operations.

A major safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.

Building sites are inherently dangerous, and operating in the homebuilding industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we own, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident or injury could expose us to liability that could be costly. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies or governmental authorities, and our ability to attract customers, which in turn could have a material adverse effect on our business, financial condition and operating results.

We rely on subcontractors to construct our homes and, in many cases, to obtain, building materials. The failure of our subcontractors to properly construct our homes, or to obtain suitable building materials, may be costly.

We engage subcontractors to perform the actual construction of our homes, and in many cases, to obtain the necessary building materials. Despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues we repair the homes in accordance with our new home warranty standards and as required by law. The cost of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the cost of repair from subcontractors, suppliers and insurers.

Our mortgage subsidiary may become obligated to repurchase loans it has sold in the secondary mortgage market or may become subject to borrower lawsuits.

While our mortgage subsidiary generally sells the loans it originates within a short period of time in the secondary mortgage market on a non-recourse basis, this sale is subject to an obligation that we repurchase the loan or make a "make-whole" payment if, among other things, the purchaser's underwriting guidelines are not met or there is fraud in connection with the loan.  It is possible that our mortgage subsidiary will be required to fund make-whole payments and/or repurchase loans as the holders of defaulted loans scrutinize loan files to seek reasons to require us to do so. Further, future make-whole payments could have a higher severity than those previously experienced. In such cases our current reserves might prove to be inadequate and we would be required to use additional cash and take additional charges to reflect the higher level of repurchase and make-whole activity, which could harm our financial condition and results of operations.

We are dependent on the services of key employees and the loss of any substantial number of these individuals or an inability to hire additional personnel could adversely affect us.

Our success is dependent upon our ability to attract and retain skilled employees, including personnel with significant management and leadership skills. Competition for the services of these individuals in many of our operating markets can be intense and has increased as market conditions have improved. If we are unable to attract and retain skilled employees, we may be unable to accomplish the objectives set forth in our business plan.

We may not be able to successfully identify, complete and integrate acquisitions, which could harm our profitability and divert management resources.

We may from time to time acquire other homebuilders or related businesses. Successful acquisitions require us to correctly identify appropriate acquisition candidates and to integrate acquired operations and management with our own. Should we make an error in judgment when identifying an acquisition candidate, should the acquired operations not perform as anticipated, or should we fail to successfully integrate acquired operations and management, we will likely fail to realize the benefits we intended to derive from the acquisition and may suffer other adverse consequences. Acquisitions involve a number of other risks, including the diversion of the attention of our management and corporate staff from operating our existing business, potential charges to earnings in the event of any write-down or write-off of goodwill and other assets recorded in connection with acquisitions and exposure to the acquired company's pre-existing liabilities. We can give no assurance that we will be able to successfully identify, complete and integrate acquisitions.

Our failure to maintain the security of our electronic and other confidential information could expose us to liability and materially adversely affect our financial condition and results of operations; Information technology failures could harm the Company's business

Privacy, security, and compliance concerns have continued to increase as technology has evolved. As part of our normal business activities, we collect and store certain confidential information, including personal information of homebuyers/borrowers and information about employees, vendors and suppliers. This information is entitled to protection under a number of regulatory regimes. We may share some of this information with vendors who assist us with certain aspects of our business, particularly our mortgage and title businesses. Our failure to maintain the security of the data which we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in customers confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our financial condition and results of operations.

In addition, our information technology systems are dependent upon global communications providers, Web browsers, telephone systems and other aspects of the Internet infrastructure that have experienced significant systems failures and electrical outages in the past. While we take measures to ensure our major systems have redundant capabilities, our systems are susceptible to outages from fire, floods, power loss, telecommunications failures, break-ins, cyber attacks and similar events. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions resulting from unauthorized tampering with our computer systems. The occurrence of any of these events could materially or even entirely disrupt or damage our information technology systems and hamper our internal operations, our ability to provide services to our customers and the ability of our customers to access our information technology systems. A material network breach in the security of our information technology systems could include the theft of our intellectual property or trade secrets. As a result, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Negative publicity could adversely affect our reputation and our business, financial results and stock price.

Unfavorable media related to our industry, company, brand, personnel, operations, business performance, or prospects may impact our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity is disseminated has increased dramatically through the use of electronic communication, including social media outlets, websites, and blogs. Our success in maintaining and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.

Regulatory Risks

We are subject to extensive government regulation, which can increase costs and reduce profitability.

Our homebuilding operations, including land development activities, are subject to extensive federal, state and local regulation, including environmental, construction, employment and worker health and safety, zoning and land use regulation. This regulation affects all aspects of the homebuilding process and can substantially delay or increase the costs of homebuilding activities, even on land for which we already have approvals. During the development process, we must obtain the approval of numerous governmental authorities that regulate matters such as:

·	permitted land uses, levels of density and architectural designs;

·	the level of energy efficiency our homes are required to achieve;

·	the level of greenhouse emissions relating to our operations and the homes we build;

·	the installation of utility services, such as water and waste disposal;

·	the dedication of acreage for open space, parks, schools and other community services; and

·	the preservation of habitat for endangered species and wetlands, storm water control and other environmental matters.

 

The approval process can be lengthy, can be opposed by consumer or environmental groups, and can cause significant delays or permanently halt the development process. Delays or a permanent halt in the development process can cause substantial increases to development costs or cause us to abandon the project and to sell the affected land at a potential loss, which in turn could harm our operating results.

In addition, new housing developments are often subject to various assessments or impact fees for schools, parks, streets, highways and other public improvements. The costs of these assessments are subject to substantial change and can cause increases in the effective prices of our homes, which in turn could reduce our sales and/or profitability.

There continues to be a variety of energy related legislation being considered for enactment around the world. For instance, for the last several years, the federal congress has considered an array of energy related initiatives, from carbon "cap and trade" to a federal energy efficiency building code that would increase energy efficiency requirements for new homes between 30 and 50 percent. And in California, where we derive a significant portion of our profits, current regulations, if not altered or delayed, will require new homebuilders like us to build "net-zero" energy homes by 2020.  These potential and actual laws, rules and regulations, if enacted or enforced, all have the potential to increase the cost of home construction significantly, which in turn could reduce our sales and/or profitability.

Much of the new and proposed energy related regulation is a response to concerns about climate change. As climate change concerns grow, legislation and regulatory activity of this nature is expected to continue and become more onerous. Similarly, energy related initiatives will impact a wide variety of companies throughout the world and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, these initiatives could have an indirect adverse effect on our operations and profitability to the extent the suppliers of our materials are burdened with expensive cap and trade and similar energy related regulations.

Our mortgage operations are also subject to federal, state, and local regulation, including eligibility requirements for participation in federal loan programs and various consumer protection laws. Our title insurance agency operations are subject to state insurance and other laws and regulations. Failure to comply with these requirements can lead to administrative enforcement actions, fines and penalties, the loss of required licenses and other required approvals, claims for monetary damages or demands for loan repurchase from investors, and rescission or voiding of the loan by the consumer.

Increased regulation of the mortgage industry could harm our future sales and earnings.

The mortgage industry remains under intense scrutiny and continues to face increasing regulation at the federal, state and local level. Changes in regulation have negatively impacted the full spectrum of mortgage related activity. Potential changes to federal laws and regulations could have the effect of limiting the activities of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the entities that provide liquidity to the secondary mortgage market, which could lead to increases in mortgage interest rates. At the same time, the Federal Housing Administration's rules regarding Borrower FICO scores, down payment standards, and limiting the amount of permitted seller concessions, lessen the number of buyers able to finance a new home. All of these regulatory activities reduce the number of potential buyers who qualify for the financing necessary to purchase our homes, which could harm our future sales and earnings.

Changes to tax laws could make homeownership more expensive.

Current tax laws generally permit significant expenses associated with owning a home, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual's federal, and in many cases, state, taxable income. If the federal or state governments were to change applicable tax law to eliminate or reduce these benefits for all or certain classes of taxpayers, the after-tax cost of owning a home could increase significantly. This could harm our future sales and earnings.

States, cities and counties in which we operate may adopt slow growth or no growth initiatives reducing our ability or increasing our costs to build in these areas, which could harm our future sales and earnings.

Several states, cities and counties in which we operate have in the past approved, or approved for inclusion on their ballot, various "slow growth" or "no growth" initiatives and other ballot measures that could negatively impact the land we own as well as the availability of additional land and building opportunities within those localities. Approval of slow or no growth measures would increase the cost of land and reduce our ability to open new home communities and to build and sell homes in the affected markets and would create additional costs and administrative requirements, which in turn could harm our future sales and earnings.

Financing Risks

We may need additional funds, and if we are unable to obtain these funds, we may not be able to operate our business as planned.

Our operations require significant amounts of cash. Our requirements for additional capital, whether to finance operations or to service or refinance our existing indebtedness, fluctuate as market conditions and our financial performance and operations change. We cannot assure you that we will maintain cash reserves and generate sufficient cash flow from operations in an amount to enable us to service our debt or to fund other liquidity needs or business opportunities.  Additionally, while we have a $750 million unsecured revolving credit facility designed to provide us with an additional source of liquidity to meet short-term cash needs, our ability and capacity to borrow under the facility is limited by our ability to meet the covenants and borrowing conditions of the facility. 

The availability of additional capital, whether from private capital sources (including banks) or the public capital markets, fluctuates as our financial condition and market conditions in general change. There may be times when the private capital sources and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. In addition, a weakening of our financial condition or deterioration in our credit ratings could adversely affect our ability to obtain necessary funds. Even if available, additional financing could be costly or have adverse consequences. If additional funds are raised through the issuance of stock, dilution to stockholders could result. If additional funds are raised through the incurrence of debt, we will incur increased debt servicing costs and may become subject to additional restrictive financial and other covenants. We can give no assurance as to the terms or availability of additional capital. If we are not successful in obtaining or refinancing capital when needed, it could adversely impact our ability to operate our business effectively, which could reduce our sales and earnings, and adversely impact our financial position.

We have substantial debt and may incur additional debt; leverage may impair our financial condition and restrict our operations and prevent us from fulfilling our obligations under our debt instruments.

We currently have a substantial amount of debt. As of December 31, 2016, the principal amount of our homebuilding senior and convertible senior notes outstanding was approximately $3,400.5 million, $230.0 million of which matures in 2017, $800.0 million of which matures in 2018, $567.5 million of which matures between 2019 and 2020 and

 

$1,803.0 million of which matures between 2021 and 2032.  In addition, the instruments governing our debt permit us to incur additional debt.  Our existing debt and any additional debt we incur could:

·	make it more difficult for us to satisfy our obligations under our existing debt instruments;

·	increase our vulnerability to general adverse economic and industry conditions;

·	limit our ability to obtain additional financing to fund land acquisitions and construction and development activities, particularly when the availability of financing in the capital markets is limited;

·

require a substantial portion of our cash flows from operations for the payment of interest on our debt, reducing our ability to use our cash flows to fund working capital, land acquisitions and land development, acquisitions of other homebuilders and related businesses and other general corporate requirements;

·	limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and

·	place us at a competitive disadvantage to less leveraged competitors.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.

Our ability to make payments on and refinance our debt and to fund planned capital expenditures depends on our ability to generate cash flow in the future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before maturity. We cannot assure you that we will be able to refinance any of our debt on favorable terms, if at all. Any inability to generate sufficient cash flow or refinance our debt on favorable terms could have a material adverse effect on our financial condition.

In addition, our 1.25% Convertible Senior Notes due 2032 (the "Convertible Notes") entitle holders to require us to repurchase their notes at a price of 100% of the principal amount, plus accrued and unpaid interest, on August 1, 2017, 2022 or 2027, or in the event of a fundamental change (as defined in the indenture governing the Convertible Notes).  If we do not have sufficient funds to repurchase notes when we are required to do so, or if instruments governing debt we have incurred prohibit us from using cash or other assets for that purpose, we might be unable to meet our obligations. Our failure to repurchase the Convertible Notes at a time when their repurchase is required by the indenture would constitute a default under the indenture.  A default under the Convertible Notes indenture, or the fundamental change itself, could also lead to a default under our revolving credit facility or other debt securities we have issued or could cause borrowings we have incurred to become due.  If the repayment of a substantial amount of indebtedness were to be accelerated after any applicable notice or grace period, we might not have sufficient funds to repay the indebtedness and repurchase the notes.

We currently have significant amounts invested in unconsolidated joint ventures with independent third parties in which we have less than a controlling interest. These investments are highly illiquid and have significant risks.

We participate in unconsolidated homebuilding and land development joint ventures with independent third parties in which we have less than a controlling interest.  At December 31, 2016, we had an aggregate of $127.1 million invested in these joint ventures, of which two joint ventures had project specific debt outstanding, which totaled $31.0 million.  This joint venture debt is non-recourse to us.

While these joint ventures provide us with a means of accessing larger and/or more desirable land parcels and lot positions, they are subject to a number of risks, including the following:

·

Restricted Payment Risk.    Certain of our senior notes limit our ability to make investments in joint ventures. If we become unable to fund our joint venture obligations this could result in, among other things, defaults under our joint venture operating agreements, loan agreements, and credit enhancements. And, our failure to satisfy our joint venture obligations could also affect our joint venture's ability to carry out its operations or strategy which could impair the value of our investment in the joint venture.

·	Entitlement Risk.    Certain of our joint ventures acquire parcels of unentitled raw land. If the joint venture is unable to timely obtain entitlements at a reasonable cost, project delay or even project termination may occur resulting in an impairment of the value of our investment.

·	Development Risk.    The projects we build through joint ventures are often larger and have a longer time horizon than the typical project developed by our wholly-owned homebuilding operations. Time delays associated with

obtaining entitlements, unforeseen development issues, unanticipated labor and material cost increases, higher carrying costs, and general market deterioration and other changes are more likely to impact larger, long-term projects, all of which may negatively impact the profitability of these ventures and our proportionate share of income.

·

Financing Risk.    There are generally a limited number of sources willing to provide acquisition, development and construction financing to land development and homebuilding joint ventures.  During difficult market conditions, it may be difficult or impossible for our joint ventures to obtain financing on commercially reasonable terms, or for our joint ventures to refinance existing borrowings as such borrowings mature. As a result, we may be required to contribute our corporate funds to the joint venture to finance acquisition and development and/or construction costs following termination or step-down of joint venture financing that the joint venture is unable to restructure, extend, or refinance with another third party lender. In addition, our ability to contribute our funds to or for the joint venture may be limited as n discussed above.

·

Contribution Risk.    Under credit enhancements that we typically provide with respect to joint venture borrowings, we and our partners could be required to make additional unanticipated investments in these joint ventures, either in the form of capital contributions or loan repayments, to reduce such outstanding borrowings. We may have to make additional contributions that exceed our proportional share of capital if our partners fail to contribute any or all of their share. While in most instances we would be able to exercise remedies available under the applicable joint venture documentation if a partner fails to contribute its proportional share of capital, our partner's financial condition may preclude any meaningful cash recovery on the obligation.

·	Completion Risk.    We often sign a completion agreement in connection with obtaining financing for our joint ventures. Under such agreements, we may be compelled to complete a project even if we no longer have an economic interest in the property.

·

Illiquid Investment Risk.    We lack a controlling interest in our joint ventures and therefore are generally unable to compel our joint ventures to sell assets, return invested capital, require additional capital contributions or take any other action without the vote of at least one or more of our venture partners. This means that, absent partner agreement, we may not be able to liquidate our joint venture investments to generate cash.

·

Partner Dispute.    If we have a dispute with one of our joint venture partners and are unable to resolve it, a buy-sell provision in the applicable joint venture agreement could be triggered or we may otherwise pursue a negotiated settlement involving the unwinding of the venture and it is possible that litigation between us and our partner(s) could result. In such cases, we may sell our interest to our partner or purchase our partner's interest. If we sell our interest, we will forgo the profit we would have otherwise earned with respect to the joint venture project and may be required to forfeit our invested capital and/or pay our partner to release us from our joint venture obligations. If we are required to purchase our partner's interest, we would need to fund this purchase, as well as the completion of the project, with corporate level capital and to consolidate the joint venture project onto our balance sheet, which could, among other things, adversely impact our liquidity, our leverage and other financial conditions or covenants.

·

Consolidation Risk.    The accounting rules for joint ventures are complex and the decision as to whether it is proper to consolidate a joint venture onto our balance sheet is fact intensive. If the facts concerning an unconsolidated joint venture were to change and a triggering event under applicable accounting rules were to occur, we might be required to consolidate previously unconsolidated joint ventures onto our balance sheet which could adversely impact our leverage and other financial conditions or covenants.

 

At times, such as now, when we are pursuing a longer-term land acquisition strategy, we become directly subject to some of these risks in varying degrees, including those discussed above related to entitlement, development, financing, completion and illiquid investment. Increasing our direct exposure to these types of risks could have a material adverse effect on our financial position or results or operations.

 

Other Risks

Our principal stockholder has the ability to exercise significant influence over the composition of our Board of Directors and matters requiring stockholder approval.

As of December 31, 2016, MP CA Homes LLC held 37% of the voting power of our voting stock. Pursuant to the amended stockholders' agreement that we entered into with MP CA Homes LLC, effective October 1, 2015, MP CA Homes LLC is entitled to designate up to two directors to serve on our Board of Directors so long as they hold at least 20% of our

voting power and one director so long as they hold at least 10% of our voting power, giving MP CA Homes LLC the ability to exercise significant influence on the composition and actions of our Board of Directors. In addition, this large voting block may have a significant or decisive effect on the approval or disapproval of matters requiring approval of our stockholders, including any amendment to our certificate of incorporation, any proposed merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. The interests of MP CA Homes LLC in these other matters may not always coincide with the interests of our other stockholders. In addition, the ownership of such a large block of our voting power and the right to designate directors by MP CA Homes LLC may discourage someone from making a significant equity investment in us, even if we needed the investment to operate our business, or could be a significant factor in delaying or preventing a change of control transaction that other stockholders may deem to be in their best interests.

Our charter, bylaws, stockholders' rights agreement and debt covenants could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock.

Provisions of the Delaware General Corporation Law, our certificate of incorporation and our bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could delay or prevent a change in control of and could limit the price that investors might be willing to pay in the future for shares of our common stock.

Our certificate of incorporation also authorizes our Board of Directors to issue new series of common stock and preferred stock without stockholder approval. Depending on the rights and terms of any new series created, and the reaction of the market to the series, rights of existing stockholders could be negatively affected. For example, subject to applicable law, our Board of Directors could create a series of common stock or preferred stock with preferential rights to dividends or assets upon liquidation, or with superior voting rights to our existing common stock. The ability of our Board of Directors to issue these new series of common stock and preferred stock could also prevent or delay a third party from acquiring us, even if doing so would be beneficial to our stockholders.

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits Delaware corporations from engaging in business combinations specified in the statute with an interested stockholder, as defined in the statute, for a period of three years after the date of the transaction in which the person first becomes an interested stockholder, unless the business combination is approved in advance by a majority of the independent directors or by the holders of at least two-thirds of the outstanding disinterested shares. The application of Section 203 of the Delaware General Corporation Law could also have the effect of delaying or preventing a change of control of us.

We also have a stockholders' rights agreement that could make it difficult to acquire us without the approval of our Board of Directors. Our stockholders' rights agreement has been filed with and is publicly available at or from the SEC; see Part IV, Item 15.

 

In addition, some of our debt covenants contained in the indentures for our outstanding public notes and our revolving credit facility may delay or prevent a change in control. Our outstanding notes contain change of control provisions that give the holders of our outstanding notes the right to require us to purchase the notes upon a change in control triggering event at a purchase price equal to 101% of the principal amount of the notes plus accrued and unpaid interest.  In addition, a change of control is an event of default under our revolving credit facility.

 

None.

 

 

We lease office facilities for our homebuilding and mortgage operations.  We also lease our East Coast corporate headquarters, which is located in Rosslyn, Virginia and our West Coast corporate headquarters, which is located in Irvine, California.  The lease on the West Coast facility, which also includes offices for our Orange County division, consists of approximately 39,000 square feet and expires in August 2017.  The lease on the East Coast facility, consists of approximately 11,000 square feet and expires in February 2027.  We lease approximately 40 other properties for our other division offices, mortgage operations and design centers.  For information about land owned or controlled by us for use in our homebuilding activities, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".

 

Various claims and actions that we consider normal to our business have been asserted and are pending against us. We do not believe that any of such claims and actions will have a material adverse effect upon our results of operations or financial position.

 

None.

 

Executive Officers of the Registrant

 

Our executive officers' ages, positions and brief accounts of their business experience as of February 24, 2017, are set forth below.

 

Name	Age	Position
Scott D. Stowell	59	Executive Chairman
Larry T. Nicholson	59	Chief Executive Officer and President
Peter G. Skelly	53	Executive Vice President and Chief Operating Officer
Jeff J. McCall	45	Executive Vice President and Chief Financial Officer
Wendy L. Marlett	53	Executive Vice President and Chief Marketing Officer
John P. Babel	46	Executive Vice President, General Counsel and Secretary

 

Scott D. Stowell has served as Executive Chairman since October 2015.  Prior to that, Mr. Stowell served as Chief Executive Officer of the Company from January 2012 to September 2015 and President of the Company from March 2011 to September 2015.  From May 2007 to March 2011, Mr. Stowell served as the Company's Chief Operating Officer.  Mr. Stowell joined the Company in 1986 as a project manager.  Since March 2014, Mr. Stowell has also served as a member of the Board of Directors of Pacific Mutual Holding Company.

 

Larry T. Nicholson has served as Chief Executive Officer and President since October 2015.  Prior to that Mr. Nicholson served as Chief Executive Officer of Ryland from June 2009 to September 2015 and President of Ryland from October 2008 to September 2015.  From June 2007 to May 2009, Mr. Nicholson served as Chief Operating Officer of Ryland and Vice President of Ryland and President of their Southeast Region from 2004 to May 2007.  Mr. Nicholson held various operational and leadership positions since joining Ryland in 1996.

 

Peter G. Skelly has served as Executive Vice President and Chief Operating Officer since October 2015.  Prior to that, Mr. Skelly served as Executive Vice President and Chief Operating Officer of Ryland from 2013 to September 2015.  Prior to that, Mr. Skelly served as Senior Vice President of Ryland and President of their Homebuilding Operations from 2011 to 2013 and Senior Vice President of Ryland and President of Ryland's North/West Region from 2008 to 2011.  Mr. Skelly joined Ryland in 1998 as Assistant Controller.

 

Jeff J. McCall has served as Executive Vice President and Chief Financial Officer since June 2011.  Prior to joining the Company, Mr. McCall was Chief Financial Officer – Americas at Regus plc, the world's largest provider of serviced offices, from August 2004 to May 2011.  From December 2003 to August 2004 Mr. McCall served as Chief Financial Officer and Executive Vice President of HQ Global Workplaces, Inc., which was acquired by Regus plc in August 2004.  From 1998 to 2003, Mr. McCall was Principal at Casas, Benjamin & White LLC, a leading boutique advisory services firm specializing in middle market mergers, acquisitions, divestitures, restructuring, and private equity investments.

 

Wendy L. Marlett has served as Executive Vice President and Chief Marketing Officer since September 2010.  Ms. Marlett leads all of the Company's sales, marketing and communication functions across our operations.  Prior to joining the Company, Ms. Marlett was Senior Vice President of sales, marketing and communications at KB Home, where she held progressive roles since 1995 and was a recognized innovator in marketing and brand management.  From 1990 to 1995 she served in marketing and media relations positions for Rockwell International's automotive, printing and aerospace businesses.

 

John P. Babel has served as Executive Vice President, General Counsel and Secretary since February 2012.  Prior to that Mr. Babel served as Senior Vice President, General Counsel and Secretary of the Company from February 2009 until February 2012.  Mr. Babel joined the Company as Associate General Counsel in October 2002.  Prior to joining the Company, Mr. Babel was a corporate lawyer with the international law firm of Gibson, Dunn & Crutcher LLP.

PART II

 

 

Our shares of common stock are listed on the New York Stock Exchange under the symbol "CAA."  The following table sets forth, for the fiscal quarters indicated, the reported high and low intra-day sales prices per share of our common stock as reported on the New York Stock Exchange Composite Tape and the common dividends paid per share. 

 

		Year Ended December 31,
	2016												2015
	High				Low				Dividend				High				Low				Dividend
Quarter Ended
March 31		$	37.51			$	26.97			$	0.04			$	45.70			$	32.60			$	―
June 30			38.41				31.03				0.04				45.95				38.95				―
September 30			40.94				32.86				0.04				46.75				38.95				―
December 31			43.24				30.18				0.04				43.24				36.23				0.04

 

For further information on our dividend policy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Dividends."

As of February 24, 2017, the number of record holders of our common stock was approximately 2,025.

Issuer Purchases of Equity Securities

During the three months ended December 31, 2016, we repurchased the following shares under our repurchase program:

										Total Number				Approximate
										of Shares				Dollar Value
										Purchased as				of Shares that
										Part of				May Yet be
						Average				Publicly				Purchased
		Total Number				Price				Announced				Under the
		of Shares				Paid per				Plans or				Plans or
Period		Purchased (1)				Share				Programs (1)				Programs (1)
October 1, 2016 to October 31, 2016			1,624,874			$	32.48				1,624,874			$	409,604,148
November 1, 2016 to November 30, 2016			1,327,900			$	31.64				1,327,900			$	367,593,090
December 1, 2016 to December 31, 2016			6,355			$	32.00				6,355			$	367,389,730
Total			2,959,129			$	32.10				2,959,129

________________

(1)	On July 28, 2016, the Company announced a new $500 million common stock repurchase plan. The stock repurchase plan has no stated expiration date and replaces in its entirety the $200 million authorized by our Board of Directors on February 11, 2016.

The following graph shows a five-year comparison of cumulative total returns to stockholders of the Company, as compared with The Standard & Poor's 500 Composite Stock Index and the Dow Jones Industry Group-U.S. Home Construction Index.  The graph assumes reinvestment of all dividends.

 

Comparison of Five-Year Cumulative Total Stockholders' Return

Among CalAtlantic Group, Inc., The Standard & Poor's 500 Composite Stock Index and

the Dow Jones Industry Group-U.S. Home Construction Index

 

 

The above graph is based upon common stock and index prices calculated as of year-end for each of the last five calendar years.  The Company's common stock closing price on December 30, 2016 was $34.01 per share.  The stock price performance of the Company's common stock depicted in the graph above represents past performance only and is not necessarily indicative of future performance.

 

The following should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K.

 

		Year Ended December 31,
		2016				2015 (1)				2014				2013				2012
		(Dollars in thousands, except per share amounts)
Revenues:
Homebuilding		$	6,388,040			$	3,496,411			$	2,411,178			$	1,914,609			$	1,236,958
Financial Services			88,695				43,702				25,320				25,734				21,769
Total revenues		$	6,476,735			$	3,540,113			$	2,436,498			$	1,940,343			$	1,258,727
Pretax income:
Homebuilding		$	713,502			$	325,550			$	340,121			$	246,269			$	67,645
Financial Services			39,614				16,939				9,843				11,429				10,542
Pretax income		$	753,116			$	342,489			$	349,964			$	257,698			$	78,187
Net income (2)		$	484,730			$	213,509			$	215,865			$	188,715			$	531,421
Basic income per common share		$	4.09			$	2.51			$	2.94			$	2.59			$	7.59
Diluted income per common share		$	3.60			$	2.26			$	2.68			$	2.36			$	7.21
Weighted average common shares outstanding:
Basic			118,212,740				71,713,747				55,737,548				50,623,649				40,390,760
Diluted			135,984,985				81,512,953				63,257,082				58,234,791				44,103,780
Weighted average additional common shares outstanding
if preferred shares converted to common shares:			―				13,135,814				17,562,557				22,165,311				29,562,557
Total weighted average diluted common shares outstanding
if preferred shares converted to common shares:			135,984,985				94,648,767				80,819,639				80,400,102				73,666,337
Balance Sheet and Other Financial Data:
Homebuilding cash (including restricted cash)		$	219,407			$	187,066			$	218,650			$	376,949			$	366,808
Inventories owned		$	6,438,792			$	6,069,959			$	3,255,204			$	2,536,102			$	1,971,418
Total assets		$	8,709,044			$	8,429,402			$	4,151,639			$	3,637,552			$	3,087,268
Homebuilding debt		$	3,419,787			$	3,487,699			$	2,113,301			$	1,815,042			$	1,516,212
Financial services debt		$	247,427			$	303,422			$	89,413			$	100,867			$	92,159
Stockholders' equity		$	4,207,586			$	3,861,436			$	1,676,688			$	1,468,960			$	1,255,816
Stockholders' equity per common share (3)		$	36.77			$	31.84			$	30.47			$	26.46			$	29.45
Pro forma stockholders' equity per common share (4)		$	36.77			$	31.84			$	23.10			$	20.10			$	17.39
Cash dividends declared per share		$	0.16			$	0.04			$	―			$	―			$	―
Operating Data (excluding unconsolidated joint ventures):
Deliveries			14,229				7,237				4,956				4,602				3,291
Average selling price		$	447			$	477			$	478			$	413			$	362
Net new orders (homes)			14,435				7,163				4,967				4,898				4,014
Backlog (homes)			5,817				5,611				1,711				1,700				1,404
Average active selling communities			570				299				182				166				155

________________

(1)	2015 full year results include Ryland's operations since October 1, 2015.  Please see Note 3 of our accompanying consolidated financial statements.

(2)	Net income for 2012 includes a $454 million income tax benefit resulting from the reversal of a portion of our deferred tax asset valuation allowance.

(3)

At December 31, 2012, common shares outstanding exclude 29.6 million common equivalent shares issued during the year ended December 31, 2008 in the form of preferred stock to MP CA Homes LLC, an affiliate of MatlinPatterson Global Advisers LLC ("MP CA Homes").  On May 20, 2013, MP CA Homes converted 36,600 shares of our preferred stock into 12 million shares of our common stock.  As a result, at December 31, 2014 and 2013, common shares outstanding exclude 17.6 million common equivalent shares issuable upon conversion of preferred shares outstanding.  In addition, on October 1, 2015, MP CA Homes converted its remaining 53,565 shares of our preferred stock into 17.6 million shares of our common stock in connection with our merger with The Ryland Group, Inc., and no common equivalent shares issuable upon conversion of preferred shares were outstanding at December 31, 2015 or 2016.

(4)

At December 31, 2012, pro forma common shares outstanding include 29.6 million common equivalent shares issuable upon conversion of preferred shares outstanding.  As a result of the conversion of preferred shares by MP CA Homes described above, at December 31, 2014 and 2013, pro forma common shares outstanding include 17.6 million common equivalent shares issuable upon conversion of preferred shares outstanding.

 

The following discussion and analysis should be read in conjunction with the section "Selected Financial Data" and our consolidated financial statements and the related notes included elsewhere in this Form 10-K.

 

Results of Operations

Selected Financial Information

 

		Year Ended December 31,
		2016				2015				2014
		(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues		$	6,354,869			$	3,449,047			$	2,366,754
Land sale revenues			33,171				47,364				44,424
Total revenues			6,388,040				3,496,411				2,411,178
Cost of home sales			(4,967,278	)			(2,676,666	)			(1,748,954	)
Cost of land sales			(30,132	)			(43,274	)			(43,841	)
Total cost of sales			(4,997,410	)			(2,719,940	)			(1,792,795	)
Gross margin			1,390,630				776,471				618,383
Gross margin percentage			21.8	%			22.2	%			25.6	%
Selling, general and administrative expenses			(664,459	)			(390,710	)			(275,861	)
Income (loss) from unconsolidated joint ventures			4,057				1,966				(668	)
Other income (expense)			(16,726	)			(62,177	)			(1,733	)
Homebuilding pretax income			713,502				325,550				340,121
Financial Services:
Revenues			88,695				43,702				25,320
Expenses			(49,081	)			(26,763	)			(15,477	)
Financial services pretax income			39,614				16,939				9,843
Income before taxes			753,116				342,489				349,964
Provision for income taxes			(268,386	)			(128,980	)			(134,099	)
Net income			484,730				213,509				215,865
Less: Net income allocated to preferred shareholder			―				(32,997	)			(51,650	)
Less: Net income allocated to unvested restricted stock			(1,168	)			(369	)			(297	)
Net income available to common stockholders		$	483,562			$	180,143			$	163,918
Income per common share:
Basic		$	4.09			$	2.51			$	2.94
Diluted		$	3.60			$	2.26			$	2.68
Weighted average common shares outstanding:
Basic			118,212,740				71,713,747				55,737,548
Diluted			135,984,985				81,512,953				63,257,082
Weighted average additional common shares outstanding
if preferred shares converted to common shares:			―				13,135,814				17,562,557
Total weighted average diluted common shares outstanding
if preferred shares converted to common shares:			135,984,985				94,648,767				80,819,639
Net cash provided by (used in) operating activities		$	322,314			$	(271,361	)		$	(362,397	)
Net cash provided by (used in) investing activities		$	2,929			$	184,674			$	(31,020	)
Net cash provided by (used in) financing activities		$	(303,710	)		$	60,888			$	242,519
Adjusted Homebuilding EBITDA (1)		$	996,183			$	648,313			$	502,423

________________

(1)

Adjusted Homebuilding EBITDA means net income (plus cash distributions of income from unconsolidated joint ventures) before (a) income taxes, (b) homebuilding interest expense, (c) expensing of previously capitalized interest included in cost of sales, (d) impairment charges and deposit write-offs, (e) gain (loss) on early extinguishment of debt, (f) homebuilding depreciation and amortization, including amortization of capitalized model costs, (g) amortization of stock-based compensation, (h) income (loss) from unconsolidated joint ventures, (i) income (loss) from financial services subsidiary, (j) purchase accounting adjustments and (k) merger and other one-time transaction related costs. Other companies may calculate Adjusted Homebuilding EBITDA (or similarly titled measures) differently. We believe Adjusted Homebuilding EBITDA information is useful to management and investors as it provides perspective on the underlying performance of the business. However, it should be noted that Adjusted Homebuilding EBITDA is not a U.S. generally accepted accounting principles ("GAAP") financial measure. Due to the significance of the GAAP components excluded, Adjusted Homebuilding EBITDA should not be considered in isolation or as an alternative to net income or any other performance measure prescribed by GAAP.

Selected Financial Information (continued)

 

(1)

Continued

 

The table set forth below reconciles net income, calculated and presented in accordance with GAAP, to Adjusted Homebuilding EBITDA.

 

		Year Ended December 31,
		2016				2015				2014
		(Dollars in thousands)
Net income		$	484,730			$	213,509			$	215,865
Provision for income taxes			268,386				128,980				134,099
Homebuilding interest amortized to cost of sales			171,701				139,381				123,112
Homebuilding depreciation and amortization			61,552				40,987				27,209
EBITDA			986,369				522,857				500,285
Add:
Amortization of stock-based compensation			17,794				15,624				8,469
Cash distributions of income from unconsolidated joint ventures			671				2,830				1,875
Merger-related purchase accounting adjustments included in cost of home sales			18,535				64,170				―
Merger and other one-time costs			16,485				61,737				―
Less:
Income (loss) from unconsolidated joint ventures			4,057				1,966				(668	)
Income from financial services subsidiaries			39,614				16,939				8,874
Adjusted Homebuilding EBITDA		$	996,183			$	648,313			$	502,423

 

2016 CalAtlantic to Selected Pro Forma CalAtlantic 2015 and Pro Forma CalAtlantic 2014

On October 1, 2015, we completed our merger transaction with Ryland which essentially doubled the size of the Company.  To aid readers with comparability for the entire merged business, we are providing the below limited supplemental pro forma information.  The following unaudited selected condensed combined pro forma data combines the historical home sale revenues, homes delivered, net new orders and average active selling communities of Standard Pacific and Ryland, giving effect to the merger as if it had been consummated on January 1, 2014.  The selected condensed combined pro forma financial data are presented for illustrative purposes only, and are not necessarily indicative of results that actually would have occurred or that may occur in the future had the merger with Ryland been completed on January 1, 2014.  Accordingly this information should not be relied upon for purposes of making any investment or other decisions.  Additional information regarding the merger may be found in the Company's current report on Form 8-K, filed with the SEC on October 5, 2015, which is incorporated herein by reference.

 

		Year Ended December 31,
		Actual 2016			% Change			Pro Forma 2015			% Change			Pro Forma 2014
		(Dollars in thousands)
Home sale revenues
North		$	1,015,503			10%		$	923,541			3%		$	899,357
Southeast			1,555,980			16%			1,345,025			16%			1,154,688
Southwest			1,658,949			15%			1,442,100			9%			1,325,097
West			2,124,437			35%			1,569,631			2%			1,543,579
Consolidated total		$	6,354,869			20%		$	5,280,297			7%		$	4,922,721

 

					Year Ended December 31,
					Actual 2016			% Change		Pro Forma 2015			% Change		Pro Forma 2014
New homes delivered:
	North					3,034		11%			2,727		1%			2,711
	Southeast					4,029		8%			3,732		2%			3,664
	Southwest					3,891		10%			3,552		(2%)			3,636
	West					3,275		28%			2,549		(3%)			2,622
			Consolidated total			14,229		13%			12,560		(1%)			12,633

 

					Year Ended December 31,
					Actual 2016			% Change		Pro Forma 2015			% Change		Pro Forma 2014
					(Dollars in thousands)
Average selling prices of homes delivered:
	North				$	335		(1%)		$	339		2%		$	332
	Southeast					386		7%			360		14%			315
	Southwest					426		5%			406		12%			364
	West					649		5%			616		5%			589
			Consolidated total		$	447		6%		$	420		8%		$	390

 

					Year Ended December 31,
					Actual 2016		% Change		% Absorption Change (1)		Pro Forma 2015		% Change		% Absorption Change (1)		Pro Forma 2014
Net new orders (2):
	North				3,329		21%		10%		2,757		3%		(4%)		2,664
	Southeast				4,201		6%		(0%)		3,976		10%		(2%)		3,627
	Southwest				3,603		(11%)		(3%)		4,029		6%		(10%)		3,784
	West				3,302		7%		1%		3,089		21%		6%		2,560
			Consolidated total		14,435		4%		2%		13,851		10%		(3%)		12,635

________________

(1)	Represents the percentage change of net new orders per average number of selling communities during the period.

(2)	Net new orders are new orders for the purchase of homes during the period, less cancellations during such period of existing contracts for the purchase of homes.

 

					Year Ended December 31,
					Actual 2016			% Change		Pro Forma 2015			% Change		Pro Forma 2014
					(Dollars in thousands)
Average selling prices of net new orders:
	North				$	337		(1%)		$	339		0%		$	338
	Southeast					378		2%			369		11%			331
	Southwest					430		4%			413		10%			377
	West					630		5%			602		3%			587
			Consolidated total		$	439		3%		$	428		8%		$	398

 

					Year Ended December 31,
					Actual 2016			% Change		Pro Forma 2015			% Change		Pro Forma 2014
Average number of selling communities during the year:
	North					129		10%			117		7%			109
	Southeast					183		6%			173		12%			155
	Southwest					168		(8%)			183		18%			155
	West					90		6%			85		13%			75
			Consolidated total			570		2%			558		13%			494

 

In addition to the above supplemental pro forma information, the following presents limited unaudited supplemental pro forma operating results as if Ryland had been included in the Company's Consolidated Statements of Operations as of January 1, 2014.

 

				Year Ended December 31,
				Actual 2016			% Change		Pro Forma 2015			% Change		Pro Forma 2014
				(Dollars in thousands)
Home sale revenues				$	6,354,869		20%		$	5,280,297		7%		$	4,922,721
Pretax income				$	753,116		46%		$	515,932		(19%)		$	634,428

The supplemental pro forma operating results have been determined in accordance with ASC Topic 805, Business Combinations ("ASC 805") after adjusting the operating results of Ryland to reflect additional amortization that would have been recorded assuming the fair value adjustment to intangible assets had been applied beginning January 1, 2014.  Certain

other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts. The increase in home sale revenues and pretax income during 2016 was primarily attributable to the increase in deliveries and average selling prices compared to pro forma 2015.  The increase in pro forma home sale revenues during 2015 was primarily attributable to the increase in average selling prices, as deliveries experienced a slight decrease compared to pro forma 2014.  The decrease in pro forma pretax income during 2015 was primarily attributable to the pro forma 2015 results including $61.7 million of merger costs and a $64.2 million reduction in gross margin from home sales due to the application of purchase accounting related to homes in backlog and speculative homes under construction acquired in connection with the merger.

 

Discussion and Analysis of CalAtlantic's Actual Results in 2016, 2015 and 2014

Overview

The Company's 2016 results reflect both the continued housing market recovery and the significant impact of the merger, which essentially doubled the size of our Company.  We delivered 14,229 homes during 2016, generating home sale revenues of $6,354.9 million, up 84% from the prior year.  We reported net income of $484.7 million, or $3.60 per diluted share, as compared to $213.5 million, or $2.26 per diluted share, for 2015.  Our 2016 results include $16.5 million of merger costs and an $18.5 million reduction in gross margin from home sales due to the application of purchase accounting related to homes in backlog and speculative homes under construction acquired in connection with the merger, compared to $61.7 million of merger and other one-time costs and a $64.2 million reduction in gross margin from home sales related to purchase accounting in 2015.  Homebuilding pretax income for 2016 was $713.5 million, compared to $325.6 million in 2015 and $340.1 million in 2014.  Our gross margin from home sales was 21.8% for 2016, compared to 22.4% for 2015, and our operating margin from home sales for 2016 was 11.4%, compared to 11.1% for 2015.

We ended 2016 with $219.4 million of homebuilding cash (including $28.3 million of restricted cash), compared to $187.1 million (including $36.0 million of restricted cash) at the end of the prior year.  Net cash provided by operating activities during 2016 was $322.3 million compared to net cash used in operating activities of $271.4 million in 2015.  The improvement in operating cash flows for 2016 as compared to the prior year was driven primarily by an 84% increase in homebuilding revenues, partially offset by a $555.2 million increase in cash land purchase and development costs.  As of December 31, 2016, we had $637.9 million in remaining availability under our $750 million revolving credit facility.

Homebuilding

 

					Year Ended December 31,
					2016			% Change		2015			% Change		2014
					(Dollars in thousands)
Homebuilding revenues:
	North				$	1,017,063		287%		$	262,988		n/a		$	n/a
	Southeast					1,559,345		58%			988,773		47%			672,776
	Southwest					1,659,477		87%			889,496		80%			495,008
	West					2,152,155		59%			1,355,154		9%			1,243,394
		Total homebuilding revenues			$	6,388,040		83%		$	3,496,411		45%		$	2,411,178
Homebuilding pretax income:
	North				$	80,498		1,349%		$	5,556		n/a		$	n/a
	Southeast					130,656		87%			69,726		5%			66,232
	Southwest					165,694		134%			70,851		45%			48,958
	West					336,654		88%			179,417		(20%)			224,931
		Total homebuilding pretax income			$	713,502		119%		$	325,550		(4%)		$	340,121
Homebuilding pretax income as a percentage of homebuilding revenues:
	North					7.9%		5.8%			2.1%		n/a			n/a
	Southeast					8.4%		1.3%			7.1%		(2.7%)			9.8%
	Southwest					10.0%		2.0%			8.0%		(1.9%)			9.9%
	West					15.6%		2.4%			13.2%		(4.9%)			18.1%
		Total homebuilding pretax income percentage				11.2%		1.9%			9.3%		(4.8%)			14.1%

 

 

					As of December 31,
					2016			% Change		2015			% Change		2014
					(Dollars in thousands)
Total Assets:
	North				$	1,181,544		57%		$	732,689		n/a		$	n/a
	Southeast					2,253,289		26%			1,766,241		67%			1,060,343
	Southwest					1,842,869		26%			1,470,654		135%			624,765
	West					2,500,163		8%			2,357,597		35%			1,744,308
	Corporate (1)					578,780		(66%)			1,678,072		239%			494,920
		Total homebuilding				8,356,645		4%			8,005,253		104%			3,924,336
	Financial services					352,399		(17%)			424,149		87%			227,303
			Total Assets		$	8,709,044		3%		$	8,429,402		103%		$	4,151,639

________________

(1)

The assets in our Corporate Segment include cash and cash equivalents and our deferred tax asset, and at December 31, 2015 included $0.9 billion of goodwill recorded in connection with our merger with Ryland.  During the 2016 second quarter, recorded goodwill was allocated to the Company's reporting units (as of December 31, 2016, approximately $0.3 billion was included in each of the North, Southeast and Southwest segments, and approximately $0.1 billion was included in the West segment).

 

For 2016, we generated homebuilding pretax income of $713.5 million compared to $325.6 million in 2015.  This increase was primarily the result of an 84% increase in home sale revenues due to our October 1, 2015 merger with Ryland and a decrease in merger and other one-time costs of approximately $45 million, which was partially offset by a decrease in gross margin percentage from home sales.  Homebuilding pretax income as a percentage of homebuilding revenues for 2016 increased 190 basis points compared to the prior year, with the North region generating the highest increase of 580 basis points. The North region pretax income as a percentage of home sales for 2015 was significantly and adversely impacted by the fair value accounting applied to homes under construction acquired in connection with the merger, with $20 million recognized as an increase to cost of sales in 2015, compared to $5 million in 2016.  Homebuilding pretax income as a percentage of homebuilding revenues for 2016 was relatively consistent across our remaining Southeast, Southwest and West regions, with year over year increases ranging from 130 basis points in the Southeast to 240 basis points in the West.

For 2015, we generated homebuilding pretax income of $325.6 million compared to $340.1 million in 2014.  This decrease was primarily the result of approximately $62 million in merger and other one-time costs associated with our October 1, 2015 merger with Ryland, which was partially offset by a 46% increase in home sale revenues.  Homebuilding pretax income as a percentage of homebuilding revenues for 2015 decreased 480 basis points compared to 2014, with the West region reporting the highest decrease of 490 basis points.  The larger decrease in our West region relative to our Southeast and Southwest regions was primarily the result of our West region being the least impacted by the merger with Ryland, with home sale revenues increasing only 9% during 2015 compared to 47% and 80% increases within our Southeast and Southwest regions, respectively.

Revenues

Homebuilding revenues for 2016 increased 83% from 2015 primarily as a result of an 84% increase in home sale revenues, driven by a 97% increase in new home deliveries.  The increase in home sale revenues is primarily attributable to our October 1, 2015 merger with Ryland coupled with meaningful organic growth.  On a pro forma basis, home sale revenues increased 20% for 2016 compared to 2015, led by strong increases in the West region, which increased by 35% on a pro forma basis primarily as a result of a 28% increase in deliveries.

 

The 287% increase in homebuilding revenues for 2016 in the North region was attributable to the merger with Ryland as 2015 only included revenues commencing on the October 1, 2015 merger date whereas 2016 included revenues for the full year.  The increase in homebuilding revenues in the Southeast and Southwest regions of 58% and 87%, respectively, was primarily the result of the merger with Ryland and meaningful organic growth.  Homebuilding revenues for 2016 increased 59% in the West primarily due to organic growth in the Company's California markets and the impact of the merger in the Company's Arizona market.

Homebuilding revenues for 2015 increased 45% from 2014 primarily as a result of a 46% increase in home sale revenues, driven by a 46% increase in new home deliveries.  The increase in home sale revenues is primarily attributable to the merger with Ryland combined with moderate organic growth.  On a pro forma basis, home sale revenues increased 7% for the 2015 compared to 2014.

 

						Year Ended December 31,
						2016		% Change		2015		% Change		2014
New homes delivered:
	North					3,034		286%		787		n/a		n/a
	Southeast					4,029		63%		2,471		32%		1,871
	Southwest					3,891		106%		1,891		79%		1,059
	West					3,275		57%		2,088		3%		2,026
			Consolidated total			14,229		97%		7,237		46%		4,956

 

New home deliveries increased 97% in 2016 as compared to the prior year, resulting primarily from the new selling communities we acquired in connection with our October 1, 2015 merger with Ryland.  New home deliveries increased 46% in 2015 as compared to the prior year, resulting primarily from the backlog and new selling communities we acquired in connection with the Ryland merger.

 

					Year Ended December 31,
					2016			% Change		2015			% Change		2014
					(Dollars in thousands)
Average selling prices of homes delivered:
	North				$	335		0%		$	334		n/a		$	n/a
	Southeast					386		(2%)			395		12%			354
	Southwest					426		(8%)			462		(1%)			465
	West					649		1%			640		7%			598
			Consolidated total		$	447		(6%)		$	477		(0%)		$	478

 

During 2016, our consolidated average home price of $447 thousand decreased 6% when compared to $477 thousand for 2015, resulting primarily from a geographic mix shift to a higher proportion of deliveries from communities outside of California.  During 2015, our consolidated average home price of $477 thousand was essentially flat when compared to $478 thousand for 2014, resulting primarily from the lower average home price of the homes in backlog we acquired in connection with our October 1, 2015 merger with Ryland.

Gross Margin

Our 2016 gross margin percentage from home sales was 21.8%, down 60 basis points from 22.4% in 2015.  Our 2016 gross margins were adversely impacted by the fair value accounting applied to homes in backlog and speculative homes under construction acquired in connection with our October 1, 2015 merger with Ryland, with fair value accounting causing us to recognize approximately $19 million as an increase to cost of sales during 2016, as well as a mix shift from higher to lower margin communities. 

 

Our 2015 gross margin percentage from home sales was 22.4%, down 370 basis points from 26.1% in 2014.  Our 2015 gross margins were significantly and adversely impacted by the fair value accounting applied to homes under construction acquired in connection with the merger, with fair value accounting causing us to recognize approximately $64 million as an increase to cost of sales during the 2015 fourth quarter. 

SG&A Expenses

Our 2016 SG&A expenses (including corporate G&A) were $664.5 million compared to $390.7 million for the prior year.  Despite this increase in dollar amount, our 2016 SG&A rate from home sales was 10.5% versus 11.3% for 2015.  This 80 basis point improvement was primarily the result of an 84% increase in home sale revenues and the operating leverage we gained in connection with our October 1, 2015 merger with Ryland.  We continue to leverage our G&A expenses as our home sale revenues have increased year over year, with G&A expenses as a percentage of home sale revenues improving to 5.3% for 2016 compared to 6.3% for 2015.  Our selling expenses as a percentage of home sale revenues increased slightly at 5.2% for 2016 compared to 5.0% for 2015.

 

Our 2015 SG&A expenses (including corporate G&A) were $390.7 million compared to $275.9 million for 2014, and our 2015 SG&A rate from home sales was 11.3% versus 11.7% for 2014.  This 40 basis point improvement was primarily the result of a 46% increase in home sale revenues and the operating leverage we gained in connection with the merger, with G&A expenses as a percentage of home sale revenues improving to 6.3% for 2015 compared to 6.8% for 2014.  Our selling expenses as a percentage of home sale revenues increased slightly at 5.0% for 2015 compared to 4.9% for 2014.

 

Interest Expense

During the years ended December 31, 2016, 2015 and 2014, our qualified assets exceeded our debt.  As of December 31, 2016, 2015 and 2014, the amount of our qualified assets in excess of our debt was $1.3 billion, $1.6 billion and $827.7 million, respectively.  As a result, all of our interest incurred during 2016, 2015 and 2014 was capitalized in accordance with ASC Topic 835, Interest.

Other Income (Expense)

Other expense for 2016 was primarily attributable to $16.5 million in transaction and other one-time costs incurred in connection with our October 1, 2015 merger with Ryland.  Other expense for 2015 was primarily attributable to $61.7 million in transaction and other one-time costs incurred in connection with the merger, including $9.7 million in project abandonment costs.

 

Operating Data

 

					Year Ended December 31,
					2016		% Change		% Absorption Change (1)		2015		% Change		% Absorption Change (1)		2014
Net new orders (2):
	North				3,329		499%		39%		556		n/a		n/a		n/a
	Southeast				4,201		79%		9%		2,342		27%		(15%)		1,841
	Southwest				3,603		96%		2%		1,838		52%		(12%)		1,207
	West				3,302		36%		7%		2,427		26%		3%		1,919
			Consolidated total		14,435		102%		6%		7,163		44%		(12%)		4,967

________________

(1)	Represents the percentage change of net new orders per average number of selling communities during the period.

(2)	Net new orders are new orders for the purchase of homes during the period, less cancellations during such period of existing contracts for the purchase of homes.

 

					Year Ended December 31,
					2016		% Change		2015		% Change		2014
Cancellation rates:
	North				15%		(7%)		22%		n/a		n/a
	Southeast				14%		(1%)		15%		1%		14%
	Southwest				16%		(1%)		17%		1%		16%
	West				18%		(2%)		20%		―		20%
			Consolidated total		16%		(2%)		18%		1%		17%

 

					Year Ended December 31,
					2016			% Change		2015			% Change		2014
					(Dollars in thousands)
Average selling prices of net new orders:
	North				$	337		(3%)		$	348		n/a		$	n/a
	Southeast					378		(10%)			422		13%			374
	Southwest					430		(11%)			481		2%			473
	West					630		(4%)			653		9%			600
			Consolidated total		$	439		(14%)		$	510		5%		$	485